The Pune-based mid-tier software and engineering services company plans to merge its existing operations with BirlaSoft, an unlisted software company promoted by the CK Birla Group.

The merged entity will then be split into two separate publicly listed entities. The first company, which will be named BirlaSoft, will focus on IT services and the second, KPIT Technologies, will deliver engineering services.

Latest financials of BirlaSoft are not available. According to the data from Captialine, it reported a revenue of Rs 478 crore in FY16 and net profit of Rs 68.8 crore. KPIT reported a revenue of Rs 2,700 crore in the nine-months to December 2017 and net profit of Rs 177 crore. BirlaSoft has over 4,000 employees whereas KPIT’s workforce was 12,211 strong at the end of December 2017.

Though BirlaSoft looks smaller in size, it delivered better margin and has diversified verticals including banking, insurance, capital markets, manufacturing, healthcare, and media. In FY16, its operating margin before depreciation (EBITDA margin) was 25.8 per cent whereas KPIT reported a 10 per cent margin in the ninemonths to December 2017.

After the split, the IT service business (BirlaSoft) is expected to have revenue of $500 million (approximately Rs 3,200 cr) while the engineering services company (KPIT Technologies) will have a topline of over $200 million (around Rs 1,280 cr).

The merger-demerger arrangement will offer shareholders of KPIT an opportunity to have separate stakes in the company’s IT services and engineering services divisions.

Historically, a demerger often enhances the shareholder value. In 2015, Mastek, another mid-tier IT company, split its insurance segment into a separately listed entity called Majesco. Before the announcement of the demerger, Mastek’s market cap was around Rs 450-500 crore. Three years later, Mastek and Majesco command market caps of more than Rs 1,000 crore each.

KPIT’s stock gained nearly 5 per cent on Tuesday, buoyed by the news of strategic arrangement with BirlaSoft. At Tuesday’s closing price of Rs 219.3, its estimated price-earnings multiple based on FY18 annualised earnings works out to be 18.4. This appears to be rich for a midcap IT firm. The future stock moment will be a function of how well the company executes the business restructuring.

​​This comes as a surprise to the industry as Rakesh was recently elevated to the position of Directo Sales and Marketing which was the third promotion for him in six years of his tenure in the company.